ARR means annual recurring revenue: the yearly value of the subscriptions you have today, if none of them changed. It is MRR times twelve. The harder question founders bring to it is which ARR figure to put in the deck, because an investor who likes the number will ask for the customer list that adds up to it.
Three ARR numbers from the same company
Here is a seed-stage B2B company at the end of March, and three figures its founder could call "ARR".
What it has:
- 22 customers on monthly plans, paying €9,900 a month between them
- 6 annual contracts worth €18,000, €12,000, €12,000, €9,600, €6,000 and €4,800 a year
- 1 three-year contract at €30,000 a year, €90,000 in total
- €15,000 of implementation fees billed last quarter
- March receipts of €39,900, because the two largest annual contracts renewed and paid upfront that month
| Version | How it is built | Figure |
|---|---|---|
| Best month times twelve | March receipts €39,900 x 12 | €478,800 |
| Contract value | monthly x 12, plus annual contracts, plus the full three-year deal, plus implementation fees | €286,200 |
| ARR | monthly x 12 (€118,800), plus annual contracts (€62,400), plus one year of the three-year deal (€30,000) | €211,200 |
Only the last one is ARR. The first annualises a month in which two renewals happened to land. The second counts two years of a contract that has not been earned yet and €15,000 of fees that will not repeat. Both are more than a third above the real figure, and both fall apart the moment someone asks for the customer list and adds it up.
What goes in and what stays out
The rule is the same as for MRR, at a larger scale: count subscriptions that are live today at their annual value.
In: monthly plans times twelve, annual contracts at their yearly price, one year's worth of any multi-year contract, recurring add-ons and seats, and the discounted price a customer really pays.
Out: setup, onboarding and implementation fees; consulting and services; usage above any committed minimum; free trials; the extra years of multi-year deals; and contracts that are signed but have not started.
That last group is real, and you can show it. In the example, suppose a €24,000 annual contract is signed and starts next quarter. The honest way to present it is two lines: ARR €211,200, and committed ARR €235,200 including the signed contract. Keeping them separate costs nothing and shows you know the difference.
What €500k, €1M and €2M ARR mean
Milestones are quoted in ARR, so it helps to translate them into things you can plan against: monthly revenue and customer counts.
| ARR | MRR | Customers at €450 a month | Customers at €10,000 a year |
|---|---|---|---|
| €211,200 (the example) | €17,600 | 39 | 21 |
| €500,000 | €41,667 | 93 | 50 |
| €1,000,000 | €83,333 | 186 | 100 |
| €2,000,000 | €166,667 | 371 | 200 |
The customer columns tell you what kind of company each milestone needs. Getting to €1M on €450-a-month customers means close to two hundred of them, which is a marketing and self-serve problem. Getting there on €10,000 contracts means a hundred, which is a sales problem. Neeraj Agrawal's T2D3 roadmap, written for enterprise SaaS, describes reaching $2M of ARR with 30 to 60 customers at $30K to $80K deal sizes (TechCrunch, 2015).
ARR and the revenue in your accounts
Your profit and loss statement will show a different number, and that is fine. Revenue measures what you earned over a period that has passed. ARR measures the subscriptions in place today. If the example company started the year at €120,000 of ARR and grew steadily to €211,200, its recognised revenue for the last twelve months lands somewhere in between. An investor who sees both will expect ARR to be the higher one for a growing company. If yours is lower while the business is growing, check both.
For running the company month to month, use MRR: it reacts within a month, while the annual figure averages changes away. The MRR vs ARR comparison covers when to use which.
The other ARR
In corporate finance, ARR also stands for accounting rate of return: the average annual accounting profit of an investment divided by what the investment cost. It is used to compare capital projects and has nothing to do with subscriptions. If you are reading about startups, SaaS or fundraising, ARR means annual recurring revenue.
Before you put ARR in a deck
Three checks catch most of the problems:
- Export the customer list and make sure it adds up to the figure, with each contract at its annual value.
- Put a date on it: "ARR at 31 March". ARR is a snapshot, and an undated one invites the question of which month you picked.
- Show committed ARR, trailing revenue and one-off fees as separate lines if you want them in the story.
The ARR calculator does the arithmetic from a mix of monthly and annual plans. In Plainhub, the PDF report on the Max plan shows ARR as MRR times twelve, where MRR only counts customers marked Active on monthly or annual billing plus recurring income. Signed-but-not-started customers and one-time deals cannot leak into it, which is the version you want in front of an investor.